NFS + Fair Value Zone = PROFIT! — Transcript

In today's video, I'm going to talk about a simple trading strategy that can be applied in all markets and all time frames. It's fairly easy to spot, and it's 100% mechanical. It also provides a high probability of winning with a great risk-reward profile. The strategy consists in combining concepts from auction market theory, market structure, and supply and demand zones. I'll briefly explain the concepts, and then we'll go to the charts to see how you can apply this strategy in your own trading right away. If you wish to support the ongoing creation of videos like this one, please consider clicking the like button and subscribing if you haven't already. So, the concepts we're going to use are the non-failure swing, also called market structure shift by some, the swing point, and the idea of fair value price range, which emerges from Style Meire's auction market theory. This will lead to a high probability supply or demand zone, as you'll see. Let's break each concept down one by one, and then I'll show you the full strategy with examples right after. The first concept is the non-failure swing. The non-failure swing is one of the simplest and yet most reliable price action patterns. A bullish non-failure swing is made of a lower low followed by a higher high. A bearish non-failure swing is made of a higher high followed by a lower low. This pattern is so powerful because it incorporates a break of structure, which is often a sign of change of character, meaning the transition from trend to sideways market or from trend to opposite trend. This is a very common pattern at the beginning of a trend, which means that it has a great risk-reward potential. The ideal way of trading this pattern is to wait for a pullback near the origin of the leg that forms the pattern, meaning the lowest point in the bullish version and the highest point in the bearish version. But in order to do that effectively, precisely, and objectively, we need additional concepts. The next concept is the swing point, which is perhaps one of the most important market structure concepts. The swing point is a three-candle pattern. A swing high is formed when a candle has a lower high to the left and to the right. A swing low is formed when a candle has a higher low to the left and to the right. Every significant reversal is a swing point, but of course, not all swing points are significant reversals. So, we need ways to filter out the bad ones. The third concept is the fair value zone. The fair value zone is a concept that emerges from Stidle Meer's auction market theory. In very basic terms, areas of price overlap are areas of fair value. Areas of price gap are areas of unfair value or price discovery. We are particularly interested in the overlap between adjacent candles. In this case, for example, imagine that we have two consecutive candles like so. The fair value zone is the area where both candle ranges overlap, like it is highlighted in the rectangle. The overlap with two candles is the simplest example, but we can find the overlap over a greater number of candles. For example, here we have four candles. The fair value zone is marked by the area where all four candle ranges overlap like so. The heart of this trading strategy is to identify the fair value zone that exists in the swing point of a non-failure swing. This zone, which is always perfectly objective, is used as a supply or demand zone to catch a high-quality trade. The fair value zone out of a swing low produces a demand zone, and the fair value zone out of a swing high produces a supply zone. In order to identify the fair value zone implicit in a swing point, all you have to do is to observe the price range where all the three candles that compose the swing point overlap. There is no guesswork involved in this zone. It's 100% objective. One additional detail to this zone is the incorporation of a midpoint line, which can make the entry more objective. Once you understand the concepts individually, the strategy becomes extremely simple. Step number one is to identify a non-failure swing. Step number two is to identify the swing point that originates the non-failure swing. Step number three is to identify the fair value range in that swing point. Step number four is to extend the zone to the right. Step number five is to wait for the pullback. And step number six is to enter the trade. The stop-loss is clear in the strategy. In the case of a long trade, the stop sits just below the swing low of the non-failure swing. And in the case of a short trade, it sits just above it like so. For the entry, there are a couple of alternatives. You can use a limit order entry at any of the three levels of the zone depending on your risk tolerance. In the case of a limit order entry, you're not waiting for confirmation. For example, in a bullish setup, entering at the upper limit of the zone means a bigger stop, but also a higher probability of getting filled. Entering at the lower limit of the zone means a smaller stop, but a lower probability of getting filled. Limit order entries are more accurate, but you have a higher risk of dealing with an unreliable zone. Waiting for confirmation has a cost. Usually, the confirmation of the setup will mean a worse entry, which will of course translate into a worse risk-reward profile. There is always a trade-off. If you want a smaller stop, you must be willing to risk the trade without waiting for the confirmation. The confirmation is some sort of reaction to the zone. For example, when the candle touches the zone and forms a larger wick, that is an indication that the zone will in fact hold. For market order entries, you can simply wait for the reaction to the zone and enter at the open of the next candle. For the target, there are a couple of options as well. You can keep it simple and use a fixed 1:3 ratio based on your stop. Another possibility is trying to optimize the trade by getting out at the previous important swing point, as long as this target provides a risk-reward ratio greater than or equal to 1 to 3. Let's now move on to a few examples of the strategy. In this first example, we'll look at the 45-minute Euro USD. Here we can see that the market has produced a lower low in comparison to the previous swing point and then proceeded to make a higher high than the swing point that originated the lower low. This is the classic bullish non-failure swing pattern. What we want to do now is to detect the fair value zone in the lowest swing of the non-failure swing. First, we deduct the three candles that form the swing low. Then, we detect the range of prices where all three candles overlap, extending this range to the right to form a demand zone. Notice that this zone has already been tested successfully in the candle right next to the swing point, which is a good indication that there is in fact demand there and it is a precise zone. Like it was said previously, the ideal here is to wait for a pullback inside the zone so we can frame a long position, and you have a few alternatives in terms of the entry. You can assume the zone will work and place a buy limit order at the upper, mid, or lower limit of the zone. Recall that the zone has already been tested once, so you can use that as a confirmation. The other alternative is to wait for price to reach the zone, observe the price reaction carefully, and then go long with the market order. By moving a few candles in the future, we see that price does come back to the zone, and any of the buy limit orders would have been triggered. In this case, since the lower shadows of these two candles pierced through all three levels. If you wish to wait for confirmation and then trade with a market order, here we have the confirmation you need. The two candles that touch the zone produce more prominent lower wicks, which gives the impression that the zone is in fact holding price action successfully. Beyond that, the second candle that touches the zone is an inside...

riskreward profile. The strategy consists in combining concepts from auction market theory, market structure, and supply and demand zones. I'll briefly explain the concepts and then we'll go to the charts to see how you can apply this strategy in your own

trading right away. If you wish to support the ongoing creation of videos like this one, please consider clicking the like button and subscribing if you haven't already. So, the concepts we're going to use are the non-failure swing, also called market structure shift by

some, the swing point, and the idea of fair value price range, which emerges from Style Meire's auction market theory. This will lead to a high probability supply or demand zone as you'll see. Let's break each concept down one by one and then I'll show you

the full strategy with examples right after. The first concept is the non-failure swing. The non-failure swing is one of the simplest and yet most reliable price action patterns. A bullish non-failure swing is made of a lower low followed by a higher high. A

bearish non-failure swing is made of a higher high followed by a lower low. This pattern is so powerful because it incorporates a break of structure which is often a sign of change of character meaning the transition from trend to

sideways market or from trend to opposite trend. This is a very common pattern at the beginning of a trend which means that it has a great riskreward potential. The ideal way of trading this pattern is to wait for a

pullback near the origin of the leg that forms the pattern. Meaning the lowest point in the bullish version and the highest point in the bearish version.

But in order to do that effectively, precisely, and objectively, we need additional concepts. The next concept is the swing point, which is perhaps one of the most important market structure concepts. The swing point is a three candle pattern. A swing high is formed

when a candle has a lower high to the left and to the right. A swing low is formed when a candle has a higher low to the left and to the right. Every significant reversal is a swing point,

but of course, not all swing points are significant reversals. So, we need ways to filter out the bad ones. The third concept is the fair value zone. The fair value zone is a concept that emerges from Stidle Meer's auction market

theory. In very basic terms, areas of price overlap are areas of fair value. Areas of price gap are areas of unfair value or price discovery. We are particularly interested in the overlap between adjacent candles. In this case, for example, imagine that we have two

consecutive candles like so. The fair value zone is the area where both candle ranges overlap like it is highlighted in the rectangle. The overlap with two candles is the simplest example, but we can find the overlap over a greater

number of candles. For example, here we have four candles. The fair value zone is marked by the area where all four candle ranges overlap like so. The heart of this trading strategy is to identify the fair value zone that exists in the

swing point of a non-failure swing. This zone which is always perfectly objective is used as a supply or demand zone to catch a high quality trade. The fair value zone out of a swing low produces a demand zone and the fair value zone out

of a swing high produces a supply zone. In order to identify the fair value zone implicit in a swing point, all you have to do is to observe the price range where all the three candles that compose the swing point overlap. There is no

guesswork involved in this zone. It's 100% objective. One additional detail to this zone is the incorporation of a midpoint line which can make the entry more objective.

Once you understand the concepts individually, the strategy becomes extremely simple. Step number one is to identify a non-failure swing. Step number two is to identify the swing point that originates the non-failure swing. Step number three is to identify

the fair value range in that swing point. Step number four is to extend the zone to the right. Step number five is to wait for the pullback. And step number six is to enter the trade. The stop-loss is clear in the strategy. In

the case of a long trade, the stop sits just below the swing low of the non-failure swing. And in the case of a short trade, it sits just above it like so. For the entry, there are a couple of

alternatives. You can use a limit order entry at any of the three levels of the zone depending on your risk tolerance.

In the case of a limit order entry, you're not waiting for confirmation. For example, in a bullish setup, entering at the upper limit of the zone means a bigger stop, but also a higher probability of getting filled. Entering

at the lower limit of the zone means a smaller stop, but a lower probability of getting filled. Limit order entries are more accurate, but you have a higher risk of dealing with an unreliable zone.

Waiting for confirmation has a cost. Usually, the confirmation of the setup will mean a worse entry, which will of course translate into a worse riskreward profile. There is always a trade-off. If you want a smaller stop, you must be

willing to risk the trade without waiting for the confirmation. The confirmation is some sort of reaction to the zone. For example, when the candle touches the zone and forms a larger wick, that is an indication that the zone will in fact hold. For market order

entries, you can simply wait for the reaction to the zone and enter at the open of the next candle. For the target, there are a couple of options as well.

You can keep it simple and use a fixed 1:3 ratio based on your stop. Another possibility is trying to optimize the trade by getting out at the previous important swing point. as long as this target provides a riskreward ratio

greater than or equal to 1 to three. Let's now move on to a few examples of the strategy. In this first example, we'll look at the 45minut Euro USD. Here we can see that the market has produced a lower low in comparison to the

previous swing point and then proceeded to make a higher high than the swing point that originated the lower low.

This is the classic bullish non-failure swing pattern. What we want to do now is to detect the fair value zone in the lowest swing of the non-failure swing.

First, we deduct the three candles that form the swing low. Then, we detect the range of prices where all three candles overlap, extending this range to the right to form a demand zone. Notice that this zone has already been tested

successfully in the candle right next to the swing point, which is good indication that there is in fact demand there and it is a precise zone. Like it was said previously, the ideal here is to wait for a pullback inside the zone

so we can frame a long position and you have a few alternatives in terms of the entry. You can assume the zone will work and place a buy limit order at the upper, mid or lower limit of the zone.

Recall that the zone has already been tested once. So you can use that as a confirmation. The other alternative is to wait for price to reach the zone, observe the price reaction carefully, and then going long with the market

order. By moving a few candles in the future, we see that price does come back to the zone and any of the buy limit orders would have been triggered. In this case, since the lower shadows of these two candles pierced through all

three levels. If you wish to wait for confirmation and then trade with a market order, here we have the confirmation you need. The two candles that touch the zone produce more prominent lower wicks, which gives the impression that the zone is in fact

holding price action successfully. Beyond that, the second candle that touches the zone is an inside candle, representing a momentary stop in price action. Both of these are good signs for a long trade opportunity. The inside candle provides the opportunity of a buy

stop entry right above the high of the inside candle. The other alternative is opening the long trade with a market order in the next candle open. Let's say that in this case you decided to go for the midpoint limit order entry. The stop

in the strategy is always obvious. For a long trade, the stop is below the lowest swing point. The target in this case is also obvious since we have a very prominent high in the chart. With this entry stop and target, the riskreward

ratio is a whopping 5.6. In this particular case, any entry would have yielded a potential riskreward ratio greater than three. Moving into the future, we see that the zone indeed holds and points to a successful long trade. Price takes off the zone with a

lot of power and goes almost immediately to the target. The advantage of this strategy is the precision of the fair value zone and the objectivity of drawing it in any swing point. Still in the same chart, we can spot another

bullish non-failure swing, but from a slightly broader perspective. Now we have a lower low and a higher high. The lowest non-failure swing point is the same as before. So we have the same zone. Three candles into the future, we

see that price gaps down significantly, opens at the lower limit of the zone, and produces a suggestive bullish candle. Price then goes to the upside and comes back down to the zone once again, producing a series of touches and

reactions to the zone. Finally, price explodes once again to the upside. This was another way of framing a long position, but from a slightly different perspective. Let's move on now to the futures market, more specifically the 15-minut S&P futures. Following the

first step in our strategy, we begin with the identification of a non-failure swing. In this case, we can spot a bearish non-failure swing, meaning a higher high followed by a lower low.

This signals that we should now identify the fair value zone that exists at the non-failure swing. In the case of a bearish pattern like this, we should be looking for the fair value zone at the highest point of the pattern. These are

the three candles that form the swing high. And if we draw the zone where all three of them overlap, we get this supply zone. The next step is to wait for price to pull back to the supply zone. Recalling that you have different

options of how to enter the short position depending on your risk tolerance. You can enter with limit orders or wait for more confirmation and enter with market orders. Keep in mind that waiting for confirmation usually means that you will have a less precise

entry. Moving three bars into the future, we get this. We can clearly see price react to the supply zone with a bigger than usual upper wick. The traders who didn't get in with limit sell orders at any of the three risk

levels provided by the supply zone could simply enter with a market order in the next candle given the confirmation provided by the upper wick. Let's say you decide to enter the short trade using the market order this time. You

still have to assess if the riskreward ratio makes sense. The stop in a bearish non-failure swing is right above the swing high that forms the supply zone.

The target is usually a prominent low in the case of a short. Like we can see here, this looks like a good riskreward, but it's not optimal since it's actually a 2.4 ratio. A limit order at the lower

limit of the zone would raise the ratio to 3.7, for example. That's how important the entry technique is. In the next bar, we get this. This is where you start to question your decision of entering the short trade. This candle

still respected the supply zone, but it almost hit the stop- loss. Moving a few more candles into the future, we see that price starts to go sideways. In a good short trade setup using the strategy, price should have dropped by

now. In any case, we still see the supply zone holding and the stop loss is still intact. In the next bar, we have a very important event. Price closes above the supply zone that gave rise to this short trade opportunity. And now the

only thing you have between you and the stop- loss is your prayer. A few moments later, the inevitable happens. You are stopped out. Now is the time to sit back and reassess the situation. The worst thing you can do here is to revenge

trade or simply jump into a long position out of impulse. So the question is, were there any signs that the lower low of the non-failure swing would actually be the origin of a higher high?

If we look a little further in the past, we'll see another non-failure swing, but this one is bullish. We see a lower low and a higher high. If we mark the demand zone from the fair value zone of this

bullish non-failure swing, we get this. The failure of the short position still doesn't make sense because price hasn't reached the demand zone below. One of the possible explanations here is that price is reacting to a nested zone formed by a minor continuation demand

zone in a switched zone. The high before the lower low in the bullish non-failure swing provides a supply zone. But this zone is invalidated which turns it into a demand zone like so. Notice that just before the supply zone turned into

demand, we have a minor swing low. And that gives us the opportunity to draw another demand zone that intersects with the one that switched like so. Notice how the midpoint of the two zones is almost identical. This is probably why

the short trade idea went wrong. There was enough demand at the nested demand zone to spark a new impulse movement to the upside. The fact that the trade was stopped out is not a reason for you not to take this trade in the future. There

will be a lot of times where it works and by taking a series of trades like this, the riskreward ratio will give you the edge over time. However, it's always important to investigate the signs that you may have overlooked. The silver

lining here is that the fact that our short trade from the beginning was stopped out actually opens the door for a new opportunity. Let's erase all the lines and start the analysis fresh so you can see what I mean. Notice that we

have a new bullish non-failure swing. This allows us to move on to the next step of our strategy which is to detect the fair value zone at the swing point.

Now we are looking for a demand zone since this is a bullish non-failure swing. In this case, we have a peculiar situation because the first candle in the swing point doesn't overlap with the third candle. But there is in fact an

overlap between the second and third candles of the swing low and that gives rise to this demand zone. Notice that we are now looking at the same key level from the nested zones we just saw.

Moving into the future, we see price reacting to the midpoint of the zone. You already know what to do at this point based on the last examples. We see that price then starts to go up and it returns to the demand zone to give you a

second chance to enter. The market is not always this forgiving. So the optimal way to enter is at the first touch of the zone. Entering the market order in the next candle will be the less precise entry in here, but it's

still valid. The stop is of course below the non-failure swing and the target is an arbitrary 1:3 ratio. The reason is because the highest high of the chart simply doesn't provide enough room for a good riskreward ratio. And since we are

in an uptrend, it's not unreasonable to expect that the market will create another higher high over the next candles. We see that the long trade idea which was born out of a failure ends up succeeding. The main lesson here is that

failure can lead to success if you are able to adhere to the rules and think strategically. Hopefully this video helps you in some way. If you want to learn more advanced trading ideas, I offer several courses and ebooks. You

can check them out in my website fractlflowpro.com or you can send me an email at supportfrlflowpro.com.

If you want to support the ongoing creation of videos like this one, please click the like button, subscribe to the channel, activate the notifications, leave your feedback below in the comment section, and share this video with your training community. Thank you very much

for watching and I hope to see you in the next videos. Take care.